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May 28, 2026 – We are about to sit down to a large meal of Medicaid regs, many of which stem from requirements included in the One Big Beautiful Bill Act (OBBBA). As discussed in a previous Regs & Eggs blog post, the Centers for Medicare & Medicaid Services (CMS) must release an interim final rule implementing the Medicaid work requirement by June 1, 2026 (so we could see that rule as soon as this week). CMS also has two other Medicaid regs in the hopper: a rule impacting Medicaid provider taxes called the Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes proposed rule, and a rule aimed at addressing program-integrity-related issues in the Medicaid program called the Strengthening the Integrity of Medicaid and CHIP Managed Care, Financing, and Access to Care proposed rule. However, CMS has already fired up the Medicaid grill and gotten this meal started. Last week, CMS released the first serving of Medicaid regs: the Medicaid Managed Care State Directed Payments and Medicaid Fee-For-Service Targeted Medicaid Practitioner Payments proposed rule. While the reg’s main purpose is to implement a specific section of OBBBA, CMS went beyond the statute and included some side dishes as well. To help me go over the rule, I’m bringing in my colleagues Katie Waldo and Maddie News.
State directed payments (SDPs) allow states to direct managed care organizations to pay providers according to specific rates or methods. SDPs can be used to establish minimum or maximum fee schedules for certain types of providers, to require participation in value-based payment arrangements, or to make uniform payment rate increases. States have had significant discretion in developing SDPs (including determining which providers receive SDPs and the amounts of the payments). The Biden administration’s 2024 Medicaid managed care rule established a total payment rate limit for SDPs tied to the average commercial rate (ACR) specifically for inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at academic medical centers.
Section 71116 of OBBBA replaced the ACR-based ceiling for those four service categories with a Medicare-based limit. SDPs for those services are capped at 100% of the total published Medicare payment rate in Medicaid expansion states and 110% of the total published Medicare payment rate in non-expansion states. If no total published Medicare payment rate exists for a covered service, the applicable limit is the payment rate under the Medicaid state plan (or a waiver of such plan). While new SDPs must immediately comply with these limits, OBBBA permitted certain existing SDPs to phase down gradually beginning January 1, 2028.
The proposed rule released last week would codify the statutory requirements enacted under OBBBA and subsequent CMS guidance issued in September 2025 and revised in February 2026. However, CMS also proposed several policies that extend beyond the statute, including expanding Medicare-based payment limits to additional SDP arrangements. CMS previously indicated it was considering broader SDP payment limit reforms consistent with President Trump’s June 2025 memorandum directing CMS to align Medicaid payment rates more closely with Medicare rates.
CMS proposed to codify the policies passed in OBBBA, summarized above, including the following:
CMS proposed that if a state expands Medicaid on or after July 4, 2025, the expansion state payment limit (100% of the total Medicare published payment rate) would apply beginning with the first rating period that begins on or after the date the state begins providing expansion coverage. If a state un-expands, that state’s SDPs would be subject to the non-expansion state payment limit (110% of the total Medicare published payment rate).
Section 71116(b) of OBBBA provides for delayed compliance with the Medicare payment limits for certain eligible SDPs. These SDPs may maintain CMS-approved legacy total dollar amounts through the end of 2027. This proposed rule would largely codify the definitions and language initially provided in OBBBA, as well as the February 2026 guidance. For each rating period beginning on or after January 1, 2028, states would be required to reduce the legacy total dollar amount by at least 10 percentage points annually until the applicable payment limit is reached.
In addition to codifying what was passed in OBBBA, CMS serves up some side dishes.
CMS proposed to expand the requirement capping SDP rates at 100% of the total Medicare published payment rate for an expansion state or 110% of the total Medicare published payment rate for a non-expansion state to all SDPs, not just the four specified in previous managed care rulemaking and in OBBBA. States currently operate SDPs for other provider classes, such as dental, primary care, or personal care services. CMS also proposed for this to apply not only to the 50 states and the District of Columbia, as mandated by OBBBA, but also to the territories. CMS proposed an effective date of the first rating period beginning on or after January 1, 2029, to give states, the District of Columbia, and the territories enough time to comply. CMS believes this policy will ensure fiscal integrity in the Medicaid program and is in line with President Trump’s June 2025 memorandum directing CMS to cap Medicaid rates to not exceed Medicare rates.
CMS expressed concern that, without limits on all SDP rates, states could engage in cost shifting and increase payments for providers for services beyond the four capped under OBBBA in an effort to offset revenue losses. CMS also believes hospitals could seek to mitigate the impact of the payment limit by consolidating with other healthcare provider entities, such as independent provider practices and clinics, and by shifting certain services from an outpatient hospital setting to a clinic setting, where SDP payments would not be subject to the payment limit established in OBBBA.
CMS proposed new reporting requirements to assess compliance with the new payment limits. States would be required to submit:
This proposal reflects CMS’s view that compliance with SDP payment limits should be assessed on a per-service basis using actual paid claims data, rather than solely at the aggregate SDP expenditure level.
Under the proposed rule, when a state directs enhanced or supplemental Medicaid payments to a subset of participating providers, rather than applying a uniform payment methodology across all providers furnishing the same service, the provider’s total Medicaid fee-for-service reimbursement generally may not exceed a specified percentage of the applicable Medicare fee-for-service payment rate for the same service. The regulation would limit total Medicaid payments to 100% of the Medicare payment rate in Medicaid expansion states and 110% of the Medicare payment rate in non-expansion states, consistent with the caps across the regulation.
This provision would apply only to targeted payment arrangements and would not apply where Medicaid payment methodologies are uniform across all providers within the state or applicable geographic region, or where the payments are already subject to another federal Medicaid payment limit, such as existing upper payment limit rules or statutory payment caps.
The regulation would establish two key exceptions, so that the payment limit would not apply:
States with existing payment methodologies that exceed the new limit would be required to submit state plan amendments to achieve compliance no later than the beginning of the first state fiscal year starting on or after January 1, 2029.
For states that fail to comply with the proposed requirements of this section, future grant awards would potentially be reduced by the amount of Federal Financial Participation that CMS estimates to be attributable to the portion of payments that exceed the limit. State plan amendments that propose to exceed the limit would be subject to state plan amendment disapproval.
Currently states can implement an SDP by requiring a managed care plan to provide a uniform dollar or percentage increase for providers. The original goal of uniform increase SDPs was to ensure that this additional funding was directed toward a class of providers to enhance services and access, rather than benefiting only particular providers. CMS noted in the proposed rule that uniform increase SDPs have become more complex over time and are now the most common type of SDP. CMS expressed concern that states are funding these SDPs with provider taxes or intergovernmental transfers, giving states the ability to reimburse those providers for all or more of their taxed amount. CMS specifically cited instances where a state amended an SDP to direct a higher dollar increase when utilization was lower than projected, effectively rewarding providers retrospectively with higher payments for furnishing fewer services to Medicaid beneficiaries.
CMS also noted concerns that uniform increase SDPs are not in compliance with the new proposed payment limit. States are often unaware of the rates that managed care plans negotiate with providers prospectively, making it challenging for them to ensure that uniform increases are in compliance with the payment limit on a per service basis.
Because of these concerns, CMS proposed to prohibit new uniform increase SDPs or renewals of non-exempted uniform increase SDPs, effective for the first rating period on or after January 1, 2028. CMS believes states can achieve their programmatic goals with minimum fee schedule or maximum fee schedule SDPs. In recognition that many of the SDPs eligible for a transition period (discussed above) are uniform increase SDPs, CMS proposed to permit uniform increase SDPs only for these exempted SDPs and only until the first rating period in which the payment limit is reached. Once the payment limit is met, the state would no longer be permitted to operationalize the SDP as a uniform increase.
Under current law, states can enact SDPs that use minimum fee schedules tied to state plan approved rates, even if the service has a published Medicare rate, without written prior approval. CMS is concerned that states could implement SDPs using minimum fee schedules that could exceed the total published Medicare payment rate since states set their own state plan rates. CMS also might not be aware of these instances, since written prior approval is not required. Therefore, CMS proposed that states could direct managed care plans to adopt a minimum fee schedule for providers that provide a particular service, with the minimum fee schedule being no greater than the applicable payment limit. Such SDPs would not require written prior approval.
States can also enact SDPs that direct managed care plans to implement maximum fee schedules for providers as long as the plan retains the ability to reasonably manage risk and has discretion in accomplishing the goals of the contract. CMS proposed to modify this so that states could require managed care plans to adopt a maximum fee schedule for providers that provide a particular service, with the maximum fee schedule being no greater than the payment limit, as long as the plan retains the ability to reasonably manage risk and has discretion in accomplishing the goals of the contract. Such an SDP would not require written prior approval. CMS proposed an effective date for both of these policies of the first rating period on or after January 1, 2028.
CMS raised concerns about how states define “provider class” for SDPs, noting that the agency has historically given states latitude when it comes to defining a provider class. CMS believes some states define provider class so narrowly that an SDP may only target one provider, or tailor the provider class definition so it correlates with the source of the state share of the Medicaid program. Therefore, CMS solicited comments on whether and how it could define “provider class” in federal regulations.
There is certainly a lot to digest in this first serving of Medicaid regs, and public comments are due on July 21, 2026. Before that due date, all the other Medicaid regs may be out on the table too, so stakeholders may be able to look at the entire meal when deciding which dish to address first and how all the dishes in the meal interact with each other to produce an overall impact on individual states, providers, and patients.
Until next week, this is Jeffrey (and Maddie and Katie) saying, enjoy reading regs with your eggs.
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